Prudential Bank Vs Iac

PRUDENTIAL BANK vs.
INTERMEDIATE APPELLATE COURT (IAC),

PHILIPPINE RAYON MILLS, INC. (PRMI) and ANACLETO R. CHI
(G.R. No. 74886 December 8, 1992, DAVIDE, JR., J.:)
FACTS:
Philippine Rayon Mills, Inc. (PRMI) entered into a contract with Nissho Co., Ltd.
of Japan (Nissho) for the importation of textile machineries under a five-year deferred
payment plan. To effect the payment of the machineries, the PRMI applied for a
commercial letter of credit with the Prudential Bank in favor of Nissho. By virtue of the
said application, Prudential Bank opened a letter of credit for $128,548.78. Against this
letter of credit, drafts were drawn and issued by Nissho which were all paid by
Prudential Bank through its correspondent in Japan, the Bank of Tokyo, Ltd. As
indicated on their faces, two (2) of these drafts were accepted by PRMI through its
president Anacleto R. Chi, while the other ten (10) drafts were not.
For PRMI to take the deliveries of the machineries, it executed, by prior

agreement with Prudential Bank, a trust receipt which was signed by Chi in his capacity
as President of PRMI. PRMI was able to take the delivery of the machineries and
installed the same at its factory.
However, PRMI ceased business operation. All the textile machineries were sold
to AIC Development Corp. for P300,000.
The obligation of PRMI arising from the letter of credit and trust receipt having
remained unpaid, Prudential Bank instituted an action for the recovery of a sum of
money representing the amount paid by it to the Nissho Company Ltd. of Japan for
textile machinery imported by PRMI, represented by Anacleto R. Chi.
The trial court ruled ordering PRMI to pay Prudential Bank the sum of
P153,545.22, the amounts due under the two drafts which were accepted. But ruled that
the case is premature with regards to the other ten (10) drafts which were not accepted
by PRMI. The case is dismissed as to Anacleto R. Chi.
Petitioner seeks to review and set aside the decision of IAC which affirmed in
toto the decision of the CFI of Rizal.
ISSUE:
Whether or not presentment for acceptance of the drafts was indispensable to

make Philippine Rayon liable thereon?
HELD:
A letter of credit is defined as an engagement by a bank or other person made at

the request of a customer that the issuer will honor drafts or other demands for payment
upon compliance with the conditions specified in the credit. Through a letter of credit,
the bank merely substitutes its own promise to pay for one of its customers who in
return promises to pay the bank the amount of funds mentioned in the letter of credit
plus credit or commitment fees mutually agreed upon. In the instant case then, the
drawee was necessarily Prudential Bank. It was to the latter that the drafts were
presented for payment. In fact, there was no need for acceptance as the issued drafts
are sight drafts. Presentment for acceptance is necessary only in the cases expressly
provided for in Section 143 of the Negotiable Instruments Law (NIL). The said section
reads:
Sec. 143. When presentment for acceptance must be made. Presentment

for acceptance must be made:
(a) Where the bill is payable after sight, or in any other case,
where presentment for acceptance is necessary in order to fix
the maturity of the instrument; or
(b) Where the bill expressly stipulates that it shall be presented
for acceptance; or
(c) Where the bill is drawn payable elsewhere than at the
residence or place of business of the drawee.
In no other case is presentment for acceptance necessary in order to

render any party to the bill liable.
Obviously then, sight drafts do not require presentment for acceptance.
The acceptance of a bill is the signification by the drawee of his assent to the
order of the drawer; this may be done in writing by the drawee in the bill itself, or in a
separate instrument.
The parties herein agree, and the trial court explicitly ruled, that the subject,
drafts are sight drafts. Corollarily, they are, pursuant to Section 7 of the NIL, payable on
demand. Section 7 provides:
Sec. 7. When payable on demand. An instrument is payable on demand
(a) When so it is expressed to be payable on demand, or at

sight, or on presentation; or
(b) In which no time for payment in expressed.
Where an instrument is issued, accepted, or indorsed when overdue, it

is, as regards the person so issuing, accepting, or indorsing it, payable on
demand.
Paragraph 8 of the Trust Receipt which reads: "My/our liability for payment at
maturity of any accepted draft, bill of exchange or indebtedness shall not be
extinguished or modified" does not, contrary to the holding of the IAC, contemplate prior
acceptance by PRMI, but by Prudential Bank. Acceptance, however, was not even
necessary in the first place because the drafts which were eventually issued were sight
drafts. And even if these were not sight drafts, thereby necessitating acceptance, it
would be the bank and not PRMI which had to accept the same for the latter was
not the drawee. Presentment for acceptance is defined as the production of a bill of
exchange to a drawee for acceptance. The trial court and the IAC, therefore, erred in
ruling that presentment for acceptance was an indispensable requisite for PRMI's
liability on the drafts to attach.
Contrary to both courts' pronouncements, PRMI immediately became liable

thereon upon Prudential Bank's payment thereof. Such is the essence of the letter of
credit issued by Prudential Bank. A different conclusion would violate the principle upon
which commercial letters of credit are founded because in such a case, both the
beneficiary and the issuer, Nissho Company Ltd. and Prudential Bank, respectively,
would be placed at the mercy of PRMI even if the latter had already received the
imported machinery and Prudential Bank had fully paid for it.
The Petition is GRANTED. The appealed decision of both the CFI and IAC are
reversed and set aside.
PRMI is liable on the 12 drafts and on the trust receipt while Anacleto R. Chi is
secondarily liable on the trust receipt. The trial court erred in dismissing the complaint
against Chi.

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PRUDENTIAL BANK vs.

INTERMEDIATE APPELLATE COURT (IAC),

For PRMI to take the deliveries of the machineries, it executed, by prior

Whether or not presentment for acceptance of the drafts was indispensable to

A letter of credit is defined as an engagement by a bank or other person made at

Sec. 143. When presentment for acceptance must be made. Presentment

In no other case is presentment for acceptance necessary in order to

Obviously then, sight drafts do not require presentment for acceptance.

Sec. 7. When payable on demand. An instrument is payable on demand

(a) When so it is expressed to be payable on demand, or at

Where an instrument is issued, accepted, or indorsed when overdue, it

Contrary to both courts' pronouncements, PRMI immediately became liable

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